The Cournot Model.ppt

The Cournot Model Assumptions Two firms A, and B produce widgets Assumptions Two firms A, and B produce widgets The industry demand function is D Assumptions Two firms A, and B produce widgets The industry demand function is D Firm A produces qA; firm B produces qB Assumptions Two firms A, and B produce widgets The industry demand function is D Firm A produces qA; firm B produces qB Firm A takes its demand function as D -qB Assumptions Two firms A, and B produce widgets The industry demand function is D Firm A produces qA; firm B produces qB Firm A takes its demand function as D -qB Solving A’s problem Solving A’s problem Solving A’s problem Symmetry Just as Firm A is choosing qA to maximize profits, so too is Firm B choosing qB to maximize profits. Symmetry Just as Firm A is choosing qA to maximize profits, so too is Firm B choosing qB to maximize profits. If B changes its output, A will react by changing its output. A Reaction Function We do the mathematical approach first and then the graphical approach. A Reaction Function The industry demand function Q = 100 – 2p. A Reaction Function The industry demand function Q = 100 – 2p. The inverse demand function is P = 50 – (1/2)Q A Reaction Function The industry demand function Q = 100 – 2p. The inverse demand function is P = 50 – (1/2)Q A’s demand function is then P = 50 –(1/2)(qA+qB) A Reaction Function A’s demand function is then P = 50 –(1/2)(qA +qB) The firm’s profits are ? = PqA – 5qA A Reaction Function A’s demand function is then P = 50 –(1/2)(qA +qB) The firm’s profits are ? = [50 –(1/2)(qA +qB)]qA – 5qA A Reaction Function ? = [50 –(1/2)(qA + qB)]qA – 5qA A Reaction Function = [50 –(1/2)(qA + qB)]qA – 5qA = 50 qA–(1/2) qA 2– (1/2)qBqA – 5qA A Reaction Function = [50 –(1/2)(qA + qB)]qA – 5qA = 50 qA–(1/2) qA 2– (1/2)qBqA – 5qA = 45qA –(1/2)qA2 – (1/2)qBqA A Reaction Function A Reaction Function A Reaction Function Symmetry There is a similar reaction function for B qB = 45 – (1/2)qA Solving for